A construction loan is a short-term financing option used to cover the costs of building a new home or making significant renovations to an existing property. These loans typically have higher interest rates than traditional mortgages and are disbursed in stages, known as "draws," as construction progresses. Borrowers usually need to provide detailed plans and budgets to secure this type of loan. Once the construction is complete, the borrower may need to refinance the construction loan into a permanent mortgage. This transition allows them to pay off the short-term loan and secure long-term financing with more favorable terms. Overall, construction loans are essential for those looking to build or renovate their homes.